Citizens Advice welcomed the Office for Fair Trading's (OFT's) decision to refer the payday lending industry to the Competition Commission for a full investigation, saying the lenders' focus on speed "means proper checks fall by the wayside".

Chief executive Gillian Guy claimed payday lenders are "recklessly quick to hand out loans" and should instead focus on the "cost of credit and how they treat customers".

The Office of Fair Trading (OFT) said it decided to refer payday lenders for a full investigation. Credit: Rui Vieira/PA Wire

Ms Guy said: "Citizens Advice evidence found that in 64% of cases loans come without any checks to make sure the borrower can afford to repay, revealing that lenders aren’t taking the time to establish whether a payday loan is suitable for the customer.

"Debts quickly spiral out of control as those struggling to repay are hit with high interest rates and charges.

"The industry is in desperate need of a transformation from predatory firms to a responsible short-term credit market.”

He said: "Finally, politicians and regulators are picking up the ball. Yet it's shamefully late. Millions of people have already spent billions of pounds on these often disgustingly expensive debts that lead many people into financial hell.

"The lax regulation and enforcement in the UK means we've been easy pickings for these lenders.

"Couple that with the gradual diminishing of the Social Fund, which was the one route for people on benefits or with little cash to get short-term, interest-free loans, and it's no surprise so many people fall foul".

The Office for Fair Trading (OFT) said it is concerned that payday lenders are mainly competing on the availability and speed of loan approval, rather than how much it will cost the borrower.

The trading watchdog said:

The competitive pressure to approve loans quickly may give firms an incentive to skimp on the affordability assessment which is designed to prevent irresponsible lending and protect consumers.

The OFT is also concerned about business models that appear predicated on making loans which are unaffordable, leading to borrowers paying far more than expected through rollovers, additional interest and other charges.

The OFT's chief executive, Clive Maxwell, added, "The Competition Commission can now conduct a detailed investigation to get to the root causes and, if necessary, use its far reaching powers to fix the payday lending market".

The Office of Fair Trading (OFT) said it decided to refer payday lenders for a full investigation by the Competition Commission because it continues to suspect that features of the market "prevent, restrict or distort competition".

The Office of Fair Trading (OFT) said it decided to refer payday lenders for a full investigation. Credit: John Giles/PA Wire

The "fundamental" problems the trading watchdog has found, such as loans becoming far more expensive than struggling borrowers had expected, cannot be tackled by existing laws and guidance, it said.

The Office of Fair Trading (OFT) decision is the culmination of a large-scale investigation into the £2 billion payday sector, including spot checks on household names such as Wonga.